Moving to NZ. Keeping your home overseas?
Having an overseas rental property could cost you more than you think. But we can help you to manage that cost.
We have many clients that, when moving to New Zealand, decide to keep their home offshore. This can be a great back-up if you want to return, and of course, your home may contain many happy memories, and you just may not want to part with it. However, you need to be aware of the New Zealand tax implications if you keep your overseas property and rent it out.
Firstly, most new residents should qualify for the Transitional Resident Exemption. This is a four-year tax exemption on certain categories of overseas income. Whilst you are Transitional Resident, you generally should not need to worry about New Zealand tax on the overseas property. However, you need to know how keeping this property is going to impact your New Zealand tax position, after your Transitional Resident period.
The following discussion relates to someone who has become a New Zealand tax resident, who is not a Transitional Resident.
Overseas Rental Income
Let’s start with overseas rental income. Once you are a New Zealand tax resident, and your Transitional Resident period has expired, you will need to include any overseas rental income in your New Zealand tax return. Where you have paid tax offshore, you are likely to receive a credit for that tax paid. However, there are a number of discrepancies which mean there is often more tax to be paid in New Zealand.
Firstly, your overseas rental income must be re-calculated in accordance with New Zealand tax legislation. Unfortunately, we can’t simply use the rental income in your overseas tax return. Re-calculating the rental income under New Zealand’s tax rules is likely to result in a different rental income figure.
We particularly see issues with countries where there is a tax-free threshold, such as the United Kingdom. Or countries which have large deductions available for property owners, that New Zealand doesn’t recognise, such as the United States. These issues often mean that when we re-calculate the rental income under the New Zealand tax rules, the client has additional tax to pay in New Zealand.
Conversion into New Zealand dollars
The overseas income needs to be converted into New Zealand dollars. Specific rules apply.
Foreign loans on your overseas rental property
Foreign loans or mortgages can create nasty surprises for new residents.
It is common for clients to still have an overseas loan in relation to the rental property (a mortgage). However, these loans can create issues under both the Non-Resident Withholding Tax and Financial Arrangement rules. These regimes add further complexity, time, and costs to owning an overseas rental property. We discuss these rules further below.
Non-Resident Withholding Tax (NRWT) issues
NRWT is a form of withholding tax. This means the payer deducts an amount from the payment. The payer then pays this to the IRD rather than the intended recipient of the payment.
Where a New Zealand tax resident pays interest to an overseas bank, that person may need to first deduct NRWT from the payment, and instead, pay this to Inland Revenue. However, as most banks will not let you deduct any payments from their interest charge, chances are you will be paying the NRWT on top of your mortgage payment.
NRWT is generally deducted at 15% (of the payment). This can be reduced in some cases, depending on whether there is a Double Tax Agreement in place.
There is an alternative to NRWT. If you qualify, the Approved Issuer Levy (AIL) regime requires a payment of a 2% levy, rather than the 15% NRWT. However, as this registration cannot be back-dated, you need to ensure you are set up ready to go before the end of your Transitional Resident Exemption.
Gains and losses on overseas loans
The Financial Arrangement (FA) rules are complex (and particularly nasty). However, you need to consider them if you have an overseas loan or mortgage.
Essentially the calculations will tax any gain or loss incurred in relation to the mortgage. This includes any foreign exchange gain or loss. For example, if you start with a mortgage equivalent to NZD500,000, and you make no principal repayments, and at the end of the period the mortgage is revalued, according to the exchange rate at that time, at NZD400,000, you have effectively made a gain of NZD100,000. This is because your liability, in NZD, has reduced.
New Zealand may tax this gain under the Financial Arrangement regime. You could be taxed annually, or at the end of the loan period (generally when it is repaid), depending on the applicable rules. This calculation can be particularly complicated and can result in a tax liability, despite the absence of any realised cash gain available to pay that liability.
Selling your overseas rental property
Finally, when the time comes to sell your overseas property, you may also be caught by New Zealand’s “bright-line test”. The “bright-line test” can tax a gain on the sale of rental properties that are bought and sold within ten years, regardless of where the property is located and irrespective of whether tax is paid in that overseas country.
You may qualify for a foreign tax credit in New Zealand if you have also paid tax in the overseas country. Where available, a foreign tax credit can effectively reduce any double tax impact. Unfortunately, this can be difficult. We strongly advise you get specialist New Zealand tax advice before you sign an Agreement to sell the property. We are happy to help.
Overall, there are a number of fish-hooks if you own overseas properties once you become tax resident in New Zealand. However, we can help you to manage this risk. If you wish to keep your overseas home we recommend you talk to us as soon as possible, and ideally before you move to New Zealand.
If you have any questions, or would like further advice regarding your overseas property, please contact Angela now.
Angela Hodges
E: angela.hodges@nztaxdesk.co.nz
P: +64 (0)21 023 08149
*This publication contains generic information and opinion. New Zealand Tax Desk is not responsible for any loss sustained by anyone relying on the contents of this publication. We recommend you obtain specific taxation advice for your circumstances.
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